This document provides an overview of demand for financial assets. It discusses key concepts such as:
- The determinants of demand for financial assets, including wealth, income, liquidity, expected return, risk, and expectations.
- How expected return is calculated using probabilities of different possible returns.
- The different types of risk associated with financial assets like default risk, purchasing power risk, and interest rate risk.
- The relationship between risk and return, known as the risk-return tradeoff, and how risk premium compensates for higher risk.
- How demanders evaluate and compare characteristics of different assets to determine which ones they demand more of.
Indian Economic Development is a core subject of Under Graduate-Economics course in most of Indian University syllabus, This my first slide, carries a topic of Economic Growth and Development. It covers the basic concepts of the meaning of economic growth and development, Indicators of economic development, Major obstacles of economic development, Characteristics of underdeveloped and developed countries, Comparison/Distinguished between Developed and Underdeveloped countries. I am very much confident that this slide is going to cater to the needs of the students.
Dr. K.Santhosh Krishnan,
Assistant Professor,
Department of Economics,
Guru Nanak College (Autonomous)
Velachery, Chennai.
The foreign exchange market or forex market as it is often called is the market in which currencies are traded.
Currency Trading is the world’s largest market consisting of almost trillion in daily volumes
The market continues to rapidly grow. Not only is the forex market the largest market in the world, but it is also the most liquid, differentiating it from the other markets.
There is no central marketplace for the exchange of currency, but instead the trading is conducted over-the-counter.
This decentralization of the market allows traders to choose from a number of different dealers to make trades with and allows for comparison of prices. Typically, the larger a dealer is the better access they have to pricing at the largest banks in the world, and are able to pass that on to their clients.
The spot currency market is open twenty-four hours a day, five days a week, with currencies being traded around the world in all of the major financial centers.
All trades that take place in the foreign exchange market involve the buying of one currency and the selling of another currency simultaneously. This is because the value of one currency is determined by its comparison to another currency.
The first currency of a currency pair is called the “base currency,” while the second currency is called the counter currency. The currency pair shows how much of the counter currency is needed to purchase one unit of the base currency.
Currency pairs can be thought of as a single unit that can be bought or sold. When purchasing a currency pair, the base currency is being bought, while the counter currency is being sold.
Forex Capital Markets (FXCM) is an online currency trading firm that offers a free demo account to traders who are new and interested in the foreign exchange market.
It allows you to experience every step of currency trading including choosing currency pairs, deciding how much risk to take, tracking the time and dates of placed trades, deciding how long to stay in the trade, and when to exit the trade. It also allows the placing of stop and limit orders on trades.
Information about trading and specifically about how to use the online trading platform can be found on the FXCM webpage. In addition, FXCM offers FREE interactive online seminars that are extremely useful to both new and experienced currency traders.
Characteristics of foreign exchange
Its huge trading volume representing the largest asset class in the world leading to high liquidity;
Its geographical dispersion;
Its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15 GMT on Sunday until 22:00 GMT Friday;
The variety of factors that affect exchange rates;
The low margins of relative profit compared with other markets of fixed income;
The use of leverage to enhance profit and loss margins and with respect to account size.
In economics, the theory of the second best concerns the situation when one or more optimality conditions cannot be satisfied.
The economists Richard Lipsey and Kelvin Lancaster showed in 1956, that if one optimality condition in an economic model cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the values that would otherwise be optimal.
Politically, the theory implies that if it is infeasible to remove a particular market distortion, introducing a second (or more) market distortion may partially counteract the first, and lead to a more efficient outcome.
How to get financial information from wsj websitesakanor
This handout shows how to get financial market information from Wall Street Journal website. Wall Street Journal website provides daily stock market indexes, international stock market indexes, interest rates and bond quotes, foreign exchange rates, and many more financial market information.
Indian Economic Development is a core subject of Under Graduate-Economics course in most of Indian University syllabus, This my first slide, carries a topic of Economic Growth and Development. It covers the basic concepts of the meaning of economic growth and development, Indicators of economic development, Major obstacles of economic development, Characteristics of underdeveloped and developed countries, Comparison/Distinguished between Developed and Underdeveloped countries. I am very much confident that this slide is going to cater to the needs of the students.
Dr. K.Santhosh Krishnan,
Assistant Professor,
Department of Economics,
Guru Nanak College (Autonomous)
Velachery, Chennai.
The foreign exchange market or forex market as it is often called is the market in which currencies are traded.
Currency Trading is the world’s largest market consisting of almost trillion in daily volumes
The market continues to rapidly grow. Not only is the forex market the largest market in the world, but it is also the most liquid, differentiating it from the other markets.
There is no central marketplace for the exchange of currency, but instead the trading is conducted over-the-counter.
This decentralization of the market allows traders to choose from a number of different dealers to make trades with and allows for comparison of prices. Typically, the larger a dealer is the better access they have to pricing at the largest banks in the world, and are able to pass that on to their clients.
The spot currency market is open twenty-four hours a day, five days a week, with currencies being traded around the world in all of the major financial centers.
All trades that take place in the foreign exchange market involve the buying of one currency and the selling of another currency simultaneously. This is because the value of one currency is determined by its comparison to another currency.
The first currency of a currency pair is called the “base currency,” while the second currency is called the counter currency. The currency pair shows how much of the counter currency is needed to purchase one unit of the base currency.
Currency pairs can be thought of as a single unit that can be bought or sold. When purchasing a currency pair, the base currency is being bought, while the counter currency is being sold.
Forex Capital Markets (FXCM) is an online currency trading firm that offers a free demo account to traders who are new and interested in the foreign exchange market.
It allows you to experience every step of currency trading including choosing currency pairs, deciding how much risk to take, tracking the time and dates of placed trades, deciding how long to stay in the trade, and when to exit the trade. It also allows the placing of stop and limit orders on trades.
Information about trading and specifically about how to use the online trading platform can be found on the FXCM webpage. In addition, FXCM offers FREE interactive online seminars that are extremely useful to both new and experienced currency traders.
Characteristics of foreign exchange
Its huge trading volume representing the largest asset class in the world leading to high liquidity;
Its geographical dispersion;
Its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15 GMT on Sunday until 22:00 GMT Friday;
The variety of factors that affect exchange rates;
The low margins of relative profit compared with other markets of fixed income;
The use of leverage to enhance profit and loss margins and with respect to account size.
In economics, the theory of the second best concerns the situation when one or more optimality conditions cannot be satisfied.
The economists Richard Lipsey and Kelvin Lancaster showed in 1956, that if one optimality condition in an economic model cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the values that would otherwise be optimal.
Politically, the theory implies that if it is infeasible to remove a particular market distortion, introducing a second (or more) market distortion may partially counteract the first, and lead to a more efficient outcome.
How to get financial information from wsj websitesakanor
This handout shows how to get financial market information from Wall Street Journal website. Wall Street Journal website provides daily stock market indexes, international stock market indexes, interest rates and bond quotes, foreign exchange rates, and many more financial market information.
For all those interested in "Bond Markets" - my new infoposter "ECONOMICS" is now available:
- the poster gives an overview of the development of economic theory from its beginnings.
- the poster shows the historical roots of economic ideas and their application to contemporary economic policy debates.
View and order at http://www.cee-portal.at/PrestaShop
Best regards
Martin Kolmhofer
Chapter 7Finding the Required Rate of Return for an Invest.docxmccormicknadine86
Chapter 7
Finding the Required Rate of Return for an Investment
Associated Press
Learning Objectives
A�er studying this chapter, you should be able to:
Explain the significance of required return and its components.
Describe the rela�onship between risk and return and how to measure for both.
Iden�fy how to use required return to determine valua�on.
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Ch. 7 Introduction
Investors come in many forms. They may be individuals who invest in corporate stocks, re�rement accounts that invest in bonds, partnerships that invest in apartment
buildings, or corpora�ons that invest in produc�ve projects. One thing all these investors have in common is their desire to increase their wealth, which is done by iden�fying
projects whose value is expected to exceed their cost. If we invest $100 today in a project that produces cash flows worth $125 in today's terms, then we increase our
wealth by $25. Equa�on (7.1) is the basic formula for es�ma�ng the value of an investment, which is found by discoun�ng the expected future cash flows back to today's
equivalent value at a rate of return that is appropriate given the investment's risk. This fundamental formula for assessing value was first introduced in Chapter 2 and further
developed in Chapters 4 and 5, while Chapter 3 explored cash flows in some detail.
One part of the formula that hasn't been covered is how to es�mate the required return that is appropriate to use as the discount rate in the valua�on calcula�on. Finding
the required rate of return is the topic of this chapter (and is expanded upon in Chapter 8).
Processing math: 0%
Like children, who need to be bribed with the promise of a reward
for their good behavior, investors require a worthwhile incen�ve
before they will commit to an investment.
Beyond/SuperStock
7.1 The Building Blocks of the Required Return
In Chapter 2, we introduced the idea that investors are assumed to be ra�onal and risk averse. Because they
are (mostly!) ra�onal, investors will give up control of their money for a period of �me by inves�ng only if they
expect to increase their wealth. Therefore, investors have an almost ins�nctual return requirement as they
invest. For example, a ra�onal investor would always want to earn at least the risk-free rate of return when
inves�ng in some security or project. Otherwise, they would be se�ling for a return lower than what they
could be assured of by simply deposi�ng the funds in a savings account that is guaranteed by both the bank
and the government through the Federal Deposit Insurance Corpora�on (FDIC). The FDIC guarantees the first
$250,000 of funds depos ...
Before starting on this assignment, make sure to carefully review .docxAASTHA76
Before starting on this assignment, make sure to carefully review the background readings. Part A requires you to make some computations, and Part B requires you to analyze some scenarios using your knowledge of the concepts. So make sure to go through the computational examples in the required readings and also thoroughly review the key concepts before starting on this assignment.
Case Assignment
Part A: Quantitative Problems
1. Suppose QuickCharge Corporation manufactures phone chargers. They sell their chargers for $20. Their fixed operating costs are $100,000 and their variable operating costs are $10 per charger. Currently they are selling 30,000 chargers per year.
A. What is QuickCharge’s EBIT (earnings before interest and taxes) at current sales of 30,000?
B. What is QuickCharge’s breakeven point?
C. Calculate the EBIT if QuickCharge’s sales increase 50% to 45,000 chargers. What is the percent of change in EBIT under this increase in sales? Also, calculate the EBIT if the company's sales decrease 50% to 15,000 chargers. What is the percent of change in EBIT under this decrease in sales?
D. What is QuickCharge’s degree of operating leverage? Based on your computation, what does its operating leverage say about QuickCharge’s business risk?
2. The StayDry Umbrella Corporation will have an EBIT of $100,000 if there is a normal amount of rain this year. But if there is a drought, they will have an EBIT of only $50,000. The interest rate on debt is 10%, and the tax rate is 35%. The company does not pay any preferred dividends.
A. If StayDry has zero debt and 50,000 outstanding shares, what will its EPS (earnings per share) be if there is normal rain? What will its EPS be if there is a drought? What is its DFL (degree of financial leverage)?
B. Now suppose StayDry has decided to take on $300,000 in debt and has used these funds to buy back half of the outstanding shares so now there are only 25,000 outstanding shares. What is the new EPS and DFL for both normal rain and drought?
C. Based on your answers to a) and b) above, what are the trade-offs management has to make between zero debt or $300,000 in debt? What are the benefits and disadvantages of taking on this debt?
Part B: Conceptual Questions
1. For each of the following scenarios, explain whether the situation describes financial risk or business risk. Explain your answers to each scenario using at least one of the references from the background readings:
A. A pharmaceutical company has developed a new cancer treatment drug that has a much higher success rate than other drugs currently in the market. It has the potential to triple the company’s profits. However, the FDA has expressed concern about some side effects, and it is not clear if the FDA will approve the drug.
B. An airline has an EBIT of $100 million per year. However, it also has a huge amount of debt and pays $97 million per year in interest. Its EBIT is relatively stable but tends to go up or down by $5 million or so each ...
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Compound Interest & Rule of 72
Biggest Wealth Killer
High Cost of Waiting
Unnecessary Transfers
Opportunity Costs
Be The Bank
Eleven Ways to “Find” the Money
The REAL Retirement Miracle
For Those Who Want to Prosper & Thrive in Retirementfreddysaamy
http://ekinsurance.com/financial/retirement/
Our core capital should be designed to outlive us. In fact, it’s important for you to start thinking about your money in terms of it outliving you, not the other way around. You don’t want to outlive your money.
Similar to Econ315 Money and Banking: Learning Unit #10: Demand For Assets (20)
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
where can I find a legit pi merchant onlineDOT TECH
Yes. This is very easy what you need is a recommendation from someone who has successfully traded pi coins before with a merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi network coins and resell them to Investors looking forward to hold thousands of pi coins before the open mainnet.
I will leave the telegram contact of my personal pi merchant to trade with
@Pi_vendor_247
what is the best method to sell pi coins in 2024DOT TECH
The best way to sell your pi coins safely is trading with an exchange..but since pi is not launched in any exchange, and second option is through a VERIFIED pi merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and pioneers and resell them to Investors looking forward to hold massive amounts before mainnet launch in 2026.
I will leave the telegram contact of my personal pi merchant to trade pi coins with.
@Pi_vendor_247
Currently pi network is not tradable on binance or any other exchange because we are still in the enclosed mainnet.
Right now the only way to sell pi coins is by trading with a verified merchant.
What is a pi merchant?
A pi merchant is someone verified by pi network team and allowed to barter pi coins for goods and services.
Since pi network is not doing any pre-sale The only way exchanges like binance/huobi or crypto whales can get pi is by buying from miners. And a merchant stands in between the exchanges and the miners.
I will leave the telegram contact of my personal pi merchant. I and my friends has traded more than 6000pi coins successfully
Tele-gram
@Pi_vendor_247
Poonawalla Fincorp and IndusInd Bank Introduce New Co-Branded Credit Cardnickysharmasucks
The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
how to swap pi coins to foreign currency withdrawable.DOT TECH
As of my last update, Pi is still in the testing phase and is not tradable on any exchanges.
However, Pi Network has announced plans to launch its Testnet and Mainnet in the future, which may include listing Pi on exchanges.
The current method for selling pi coins involves exchanging them with a pi vendor who purchases pi coins for investment reasons.
If you want to sell your pi coins, reach out to a pi vendor and sell them to anyone looking to sell pi coins from any country around the globe.
Below is the contact information for my personal pi vendor.
Telegram: @Pi_vendor_247
Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
Turin Startup Ecosystem 2024
Una ricerca de il Club degli Investitori, in collaborazione con ToTeM Torino Tech Map e con il supporto della ESCP Business School e di Growth Capital
What website can I sell pi coins securely.DOT TECH
Currently there are no website or exchange that allow buying or selling of pi coins..
But you can still easily sell pi coins, by reselling it to exchanges/crypto whales interested in holding thousands of pi coins before the mainnet launch.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and resell to these crypto whales and holders of pi..
This is because pi network is not doing any pre-sale. The only way exchanges can get pi is by buying from miners and pi merchants stands in between the miners and the exchanges.
How can I sell my pi coins?
Selling pi coins is really easy, but first you need to migrate to mainnet wallet before you can do that. I will leave the telegram contact of my personal pi merchant to trade with.
Tele-gram.
@Pi_vendor_247
Even tho Pi network is not listed on any exchange yet.
Buying/Selling or investing in pi network coins is highly possible through the help of vendors. You can buy from vendors[ buy directly from the pi network miners and resell it]. I will leave the telegram contact of my personal vendor.
@Pi_vendor_247
Financial Assets: Debit vs Equity Securities.pptxWrito-Finance
financial assets represent claim for future benefit or cash. Financial assets are formed by establishing contracts between participants. These financial assets are used for collection of huge amounts of money for business purposes.
Two major Types: Debt Securities and Equity Securities.
Debt Securities are Also known as fixed-income securities or instruments. The type of assets is formed by establishing contracts between investor and issuer of the asset.
• The first type of Debit securities is BONDS. Bonds are issued by corporations and government (both local and national government).
• The second important type of Debit security is NOTES. Apart from similarities associated with notes and bonds, notes have shorter term maturity.
• The 3rd important type of Debit security is TRESURY BILLS. These securities have short-term ranging from three months, six months, and one year. Issuer of such securities are governments.
• Above discussed debit securities are mostly issued by governments and corporations. CERTIFICATE OF DEPOSITS CDs are issued by Banks and Financial Institutions. Risk factor associated with CDs gets reduced when issued by reputable institutions or Banks.
Following are the risk attached with debt securities: Credit risk, interest rate risk and currency risk
There are no fixed maturity dates in such securities, and asset’s value is determined by company’s performance. There are two major types of equity securities: common stock and preferred stock.
Common Stock: These are simple equity securities and bear no complexities which the preferred stock bears. Holders of such securities or instrument have the voting rights when it comes to select the company’s board of director or the business decisions to be made.
Preferred Stock: Preferred stocks are sometime referred to as hybrid securities, because it contains elements of both debit security and equity security. Preferred stock confers ownership rights to security holder that is why it is equity instrument
<a href="https://www.writofinance.com/equity-securities-features-types-risk/" >Equity securities </a> as a whole is used for capital funding for companies. Companies have multiple expenses to cover. Potential growth of company is required in competitive market. So, these securities are used for capital generation, and then uses it for company’s growth.
Concluding remarks
Both are employed in business. Businesses are often established through debit securities, then what is the need for equity securities. Companies have to cover multiple expenses and expansion of business. They can also use equity instruments for repayment of debits. So, there are multiple uses for securities. As an investor, you need tools for analysis. Investment decisions are made by carefully analyzing the market. For better analysis of the stock market, investors often employ financial analysis of companies.
BYD SWOT Analysis and In-Depth Insights 2024.pptxmikemetalprod
Indepth analysis of the BYD 2024
BYD (Build Your Dreams) is a Chinese automaker and battery manufacturer that has snowballed over the past two decades to become a significant player in electric vehicles and global clean energy technology.
This SWOT analysis examines BYD's strengths, weaknesses, opportunities, and threats as it competes in the fast-changing automotive and energy storage industries.
Founded in 1995 and headquartered in Shenzhen, BYD started as a battery company before expanding into automobiles in the early 2000s.
Initially manufacturing gasoline-powered vehicles, BYD focused on plug-in hybrid and fully electric vehicles, leveraging its expertise in battery technology.
Today, BYD is the world’s largest electric vehicle manufacturer, delivering over 1.2 million electric cars globally. The company also produces electric buses, trucks, forklifts, and rail transit.
On the energy side, BYD is a major supplier of rechargeable batteries for cell phones, laptops, electric vehicles, and energy storage systems.
how to sell pi coins at high rate quickly.DOT TECH
Where can I sell my pi coins at a high rate.
Pi is not launched yet on any exchange. But one can easily sell his or her pi coins to investors who want to hold pi till mainnet launch.
This means crypto whales want to hold pi. And you can get a good rate for selling pi to them. I will leave the telegram contact of my personal pi vendor below.
A vendor is someone who buys from a miner and resell it to a holder or crypto whale.
Here is the telegram contact of my vendor:
@Pi_vendor_247
How to get verified on Coinbase Account?_.docxBuy bitget
t's important to note that buying verified Coinbase accounts is not recommended and may violate Coinbase's terms of service. Instead of searching to "buy verified Coinbase accounts," follow the proper steps to verify your own account to ensure compliance and security.
2. Objectives of Learning Unit #10
This unit and the next introduce the
standard demand-supply model of asset
markets. This unit focuses on the
demand:
• Market of Financial Instruments
• Determinants of Asset Demand
• Concept and Measurement of Risk & Return
• Importance of Expectations
3. Markets of Financial Assets
• To analyze financial markets and how prices of
financial instruments are determined in financial
markets, we are primarily looking at primary
markets where saver/lenders interact with
borrower/spenders.
Primary
Financial
Markets
Savers
Lenders
Borrowers
Spenders
IOUIOU
4. Demanders and Suppliers of
Financial Assets
• In the primary markets, buyers of financial instruments
are ones investing on and demanding financial
instruments, while sellers of financial instruments are
ones issuing (producing) and supplying financial
instruments.
• Demanders of financial instruments: By purchasing
financial instruments, they are providing funds.
– Demanders of financial assets are savers/lenders.
• Suppliers of financial instruments: By issuing financial
instruments, they are borrowing funds.
– Suppliers of financial assets are borrower/spemders.
5. Quick Review of Demand
It is extremely important to distinguish terms
“quantity demanded” and “demand.”
• Quantity demanded: An amount (quantity) of financial
instruments that saver/lenders are willing to purchase
for a given conditions (i.e. price, income, risk)
− Quantity demanded is a particular number.
• Demand: A relationship between the price of financial
assets and the quantity demanded, holding all other
determinants of quantity demanded constant.
− Demand is represented by a table of numbers, or a
curve on diagram, or a mathematical function.
6. Examples of Quantity demanded
and Demand
• Quantity demanded: If you earn $50,000, and if
a price of Google stock is $200, then you may
want to purchase 5 units of Google stock.
Quantity demanded is “5 units”.
• Demand: Given $50,000 income, you may
purchase numbers of Google stock depending
on its price.
Demand is “1 unit at $500, 5 units at $200, 10
units at $100,...”
7. What Affects Your Quantity
Demanded for Financial Assets?
What may make you willing to buy more or
less of Google stocks?
• How much wealth and income do you have (do
you have spare cash now to buy Google
stocks)?
• How much profits do you expect to make from
Google stocks?
• Which one do you like to have, Google stock,
Exxon stocks, or Treasury bond?
• What else?
8. Determinants of Quantity
Demanded for Financial Assets
There are many factors affecting quantity
demanded for a particular financial asset.
• Wealth and income
• Liquidity
• Expected return
• Risk
• Liquidity, expected return, and risk of other
financial assets
• Expectation
9. Determinants of Quantity
Demanded for Financial Assets
Among six determinants of quantity demanded for
financial assets,
• Wealth and income are specific to a particular buyer
(saver/lender).
• Liquidity, Expected return, & Risk are specific to a
particular financial asset.
• Liquidity, expected return, and risk of other financial
assets include all alternative saving opportunities.
• Expectations on all above – your future income, liquidity
& risk of a particular financial asset and all other
financial assets in future.
10. Wealth and Income of Saver
• When your wealth and income increase, you are
more likely to purchase financial assets.
– Can you afford to buy one Google stock at $600?
Maybe not now. If you win mega-million lottery, then
will you buy Google stocks? maybe.
• Wealth of saver ↑
⇒ Quantity demanded for any financial assets ↑
11. Income of All Savers
• Quantity demanded for financial assets in the financial
market is sum of all quantity demanded by all savers in
the market.
• Even if you just got a job and started to make more
income (lead to more quantity demanded for financial
assets), others may have lost incomes (lead to less
quantity demanded for financial assets), so in sum the
quantity demanded for financial assets may decrease.
• It is important to see overall changes in income and
wealth of all saver/lenders to figure out an effect on
demand for financial assets in market.
• National income is one measurement of overall income
in the U.S., or Disposable income is a measurement of
how much all households in the U.S. can spend or save.
– Check Learning Unit 1 for these definitions.
12. Liquidity of Asset
• Liquidity is how easily or quickly a financial
asset can be sold.
• In general, saver/lenders prefer financial assets
with high liquidity (liquid assets) over others with
low liquidity (illiquid assets).
– If you have an extra fund now, will you use it to
purchase three-year CD or simply deposit it in your
checking account.
• Liquidity of an asset ↑
⇒ Quantity demanded for the asset ↑
13. Price or Rate of Return on Asset
• For goods and services, a price of good is the most important
determinant of quantity demanded, because a consumer makes a
decision by comparing the price of the good with benefit that a
consumer can get from the good.
– Is 8GB iPod Nano worth $200 for you? If yes, then you should purchase it
at $200, otherwise you shouldn’t.
• For financial assets, you do not consume them, instead you gain by
selling them later (or simply receiving future cash flows). So, the price
of financial asset today is as important as the price of the financial
asset when you sell it, and both of them affect your quantity
demanded for financial assets.
– Should you buy Google stock at $800? It depends. If you expect its price
to go up to $900, then you should. On the other hand, if you expect its
price to go down to $780, then you should not.
• Instead of price of financial assets, a rate of return or interest rate is
more relevant determinant of quantity demanded for financial assets.
14. Expected Return of Asset
• In most cases, you do not know exactly how much rate
of return you will get from any financial assets (unless
you hold it until its maturity).
• There is a chance that you may get a high rate of return,
and a chance that you may get even a negative rate of
return.
• So, you have to make a best guess on rate of return
from any financial asset. The best guess in finance and
economics in this case is called “Expected return.”
• Expected Return: Mean (Average) rate of return or
interest rate.
15. Expected Return and Quantity
Demanded
• In general, people prefer a higher rate of return
than a lower rate of return, holding all other
determinants (such as risk and liquidity)
constant.
– If Bank of America offers 3% interest rate on a
checking account while Wachovia Bank offers 0%
interest rate on a checking account, which bank will
you open your checking account?
• Expected return of an asset ↑
⇒ Quantity demanded for the asset ↑
16. How to Measure Expected Return
• Expected return is an average of all possible
rates of return.
• Formula: Re
=Σpi x Ri
Re
: Expected return
pi: Probability of an event i
Ri: Rate of return if an event i occurs.
17. Example of Measuring Expected
Return
The U.S. economy may become better or worse.
A probability of a better economy is 0.75, while a
probability of a worsened economy is 0.25. If the
U.S. economy is better, the rate of return on IBM
stock will be 60%. If the U.S. economy worsens,
the rate of return on IBM stock will be -20%. How
much is an expected return on the IBM stock?
Re
= (0.75)(+60%) + (0.25)(-20%) = 40%
18. Expected Return and Actual Return
• Since an expected return is a weighted average
of possible rates of returns, a saver will never
have the “expected” return in reality. An actual
rate of return will be one of all possible rates of
returns.
– It is like a student’s average test score. If she had
80, 98, 76, and 84, her average test score is 84.5. Of
course, she never made 84.5 point on any of her
tests.
– However, like average test score, a saver prefer
higher expected return than a lower expected return.
• On the previous example, no one will actually
get 40% rate of return, every one get either
60% or -20%.
19. Risk
• A term “risk” is often used as “having something
bad or likely to have something bad.” However,
in finance and economics, the term “risk” has a
special meaning.
• Risk: Uncertainty of actual total rate of return
• It does not matter whether bad thing to happen
or not, as long as you do not know the outcome
exactly, then there is a risk. It does not matter
whether it costs you or not.
20. Examples of Risk
• You got a stock free which is currently priced at $0. The price of
stock may become $0 or possibly $5 next year.
– Although it does not cost you to get a stock and you will never
loose from the stock, there is a risk on return from this stock since
you do not know whether you get $0 or $5 next year.
• You paid $10 to purchase a bankrupted Enron stock (the company no
longer exists, so no one will buy it from you).
– Although you surely loose $10 from this investment (-100% rate of
return), there is no risk because it is certain to loose.
• A student studies very hard on a test, so he can make at least B on
the test.
– There is a risk since he does not know whether he will make B or
A (and, of course, possibly C).
• A student misses a test with full understanding that a missing test will
result in F grade.
– No risk since she is surely to get F.
21. Risk and Quantity Demanded
• In general, a saver does not like risk (risk-averse).
– Of course, some people get shrilled on taking risk like
buying lottery tickets. But, are you willing to put all of
your saving and income to purchase Mega-million lottery
tickets?
– If you can get a same expected return (5%), which one
will you choose, 1 year CD with 5% interest rate (certain)
or loaning funds to a stranger for one year with 5%
expected return?
• Risk of an asset ↑
⇒ Quantity demanded for the asset ↓
22. Measuring Risk
• In economics and finance, risk is measured by a
standard deviation of rate of return.
• A standard deviation will tell you how likely you can
get an actual return close to an expected return.
– If a standard deviation is zero, then you will get the
expected return surely.
– If a standard deviation is large, then you may get more
likely an actually return far from the expected return,
possibly much more or much less than the expected
return.
• Check your statistics book for calculation of
standard deviation.
23. Three Types of Risk
There are many types (more than ten types) of
risk in finance. Here I present three types of risk
related to Money & Banking.
Default risk: A borrower may not pay the interest or the
principal.
Purchasing power risk: An actual real rate of return
could be higher or lower than one an investor initially
expected due to inflation.
Interest rate risk: A price of security may change and its
total rate of return when the market interest rate
changes.
24. Default Risk
• When you loan your funds to a stranger, there is a
possibility that a borrower may not pay back you.
• Since any organization has a possibility of
bankruptcy, almost all financial instruments have
default risk.
– Since likelihood of bankruptcy varies from one firm to
another, default risk also varies among borrowers.
• However, U.S. Treasury securities and any
securities backed by the U.S. government do not
have default risk.
– U.S. government can pay back always by collecting
more tax or issuing more cash.
25. Purchasing Power Risk
• When you purchase securities, you know how
much dollars (future cash flows) you will get from
the securities and their rates of return (nominal
interest rates).
• However, you do not know how much goods and
service you can purchase from those dollars in
future (the real interest rate).
• Since no one knows exactly a future inflation rate
(even the chairman of Fed), almost all financial
instruments have purchasing power risk.
• However, inflation-indexed bonds do not have
purchasing power risk, since it guarantees a real
interest rate.
26. Interest Rate Risk
• Most savers will not hold securities until their maturities,
instead sell them earlier.
• Savers cannot predict an exact price of security in
future, so the rate of return from the security is
uncertain.
– Although savers know Pt and C on bonds when they purchase
bonds, they do not know Pt+1.
– R = (C + Pt+1 – Pt)/Pt x 100
• Among many factors affecting the price of security, the
most important factor is the market interest rate.
– An inverse relationship: If the interest rate increases, the price
of bond will decrease and the rate of return will fall.
– Depending on whether the market interest goes up or down, a
rate of return may fall or rise in future.
27. Risk-Return Trade-off
There is a close relationship between rate of
return and risk of security.
• Higher the risk, higher the return.
• Risk premium: The spread between the expected
return from a risky asset and the interest rate of risk-
free asset.
• Lenders do not like risk. In order to make lenders
more willing to lend funds, borrowers with high risk
must pay an extra-return (risk premium) to
compensate such risk.
28. Risk Premium Formula
• Formula: i = if
+ RP
i: Interest rate on a risky asset
if
: Interest rate on a risk-free asset
RP: Risk premium
• In general, we use an interest rate on a comparable
U.S. Treasury securities (same maturity, same
coupon rate, and same characteristics) as the interest
rate on a risk-free asset.
• All other securities have some risk, so as risk
premium.
− Securities with high risk tend to have higher risk
premiums.
29. Example of Risk Premium
• An interest rate on 1-year U.S. Treasury bill is 5%, while
the interest rate on a corporate bond is 20%. How
much is a risk premium of the corporate bond?
• i = 20% on the corporate bond and if
= 5% on T-bill
⇒ 20% = 5% + RP
⇒ RP = 15%
• How much interest rate are you paying on your credit
card (Visa or Master card)? Can you compute a risk
premium on your credit card?
30. Return, Risk & Liquidity of Other
Assets
• Without any changes in savers’ wealth and
income, the amount of saving is fixed.
• If a saver prefers one asset (asset B) more than
others (asset A), then her quantity demanded for
the asset (asset B) will increase, while her
quantity demanded for the other assets (asset
A) will decrease.
• Savers always compare characteristics (liquidity,
expected return, risk) of financial assets and
choose one best for them.
31. Summary of Relationship among
Assets
• Liquidity of an asset B ↑
⇒ Quantity demanded for the asset B ↑
⇒ Quantity demanded for the asset A ↓
• Expect return of an asset B ↑
⇒ Quantity demanded for the asset B ↑
⇒ Quantity demanded for the asset A ↓
• Risk of an asset B ↑
⇒ Quantity demanded for the asset B ↓
⇒ Quantity demanded for the asset A ↑
32. Expectations
• What expected to happen tomorrow will affect the
quantity demanded for an asset today.
• Since savers purchase financial assets for their saving
purposes, their future financial conditions and market
conditions at time they plan to sell them.
– If you expect to loose your job in several months, will you start
saving more (and demanding more financial assets) now for
the rainy days?
– If you expect a bullish stock market (stock prices are expected
to rise continuously), will you buy more stocks now?
– If you expect the market interest to increase soon, should you
buy bonds now?
33. Expectations and Quantity
Demanded for Financial Assets
•Wealth of saver is expected to ↑ near future
⇒ He starts spending more (and less funds available
for saving) now
⇒ Quantity demanded for any assets ↓ now
•Liquidity of an asset is expected to ↑ near future
⇒ It will be easier to sell securities in future
⇒ Quantity demanded for the asset ↑ now
34. Expectations and Quantity
Demanded for Financial Assets
•Return of an asset is expected to ↑ near future
⇒ Saver wants to get a higher return.
⇒ Quantity demanded for the asset ↑ now
•Risk of an asset is expected to ↑ near future
⇒ It will be more uncertain how much return you may
get and possibly loss of return due to higher risk in
future
⇒ Quantity demanded for the asset ↓ now
36. Disclaimer
Please do not copy, modify, or distribute this presentation
without author’s consent.
This presentation was created and owned by
Dr. Ryoichi Sakano
North Carolina A&T State University